The Real Reason Romney’s Tax Math Doesn't Add Up

Mitt Romney’s tax plan has three key planks. He cuts personal income tax
rates by 20 percent across the board; he eliminates deductions, exclusions and
credits so that the deficit does not grow; and he doesn’t make the tax code any
less progressive. Unfortunately, as the Tax Policy Center has shown, only two of
these planks can co-exist.

Conservatives have reacted aggressively against the TPC report. It seems that
Mitt’s plan should be viable: If you cut tax rates proportionally across the
board, and eliminate tax deductions proportionally, it seems progressivity
should be unchanged. In fact, if you eliminate tax breaks starting with the
wealthy, as Romney says he would, it seems he should be able to make the tax
code even more progressive.

The idea is intuitive, but wrong. And it’s wrong because of something people
don’t realize: The tax preferences that exist today overwhelmingly benefit
people with lower and middle incomes, not the wealthy. While tax rate cuts
reduce income tax burdens proportionally, as TPC notes, there aren't enough tax
preferences for wealthy people to offset Romney's cuts at the top.

To understand this, we can look at the IRS Statistics of Income report for
2009, the most recent year available. Tax returns reporting less than $200,000
of adjusted gross income (AGI) accounted for a total AGI of $5.86 trillion, and
taxable income of $3.24 trillion. That is, deductions and exemptions amounted to
45 percent of adjusted gross income for people making under $200,000.

Tax returns with more than $200,000 of AGI (the highest-earning 2.8 percent
of filers) had a total of $1.96 trillion in AGI and $1.62 trillion in taxable
income. For this high-income group, deductions and exemptions were just 18
percent of adjusted gross income.

Put another way, filers with over $200,000 of income earned 26 percent of all
personal income in 2009, but received only 12 percent of tax exemptions and
deductions.

If you think about it, this makes sense: Everyone gets the same $3,800
personal exemption ($3,650 in 2009). That amount shrinks as a share of your
income the wealthier you get. Other deductions grow with income, but generally
not as fast as your income; wealthier people have bigger mortgages, but you can
only use so much real estate. The Alternative Minimum Tax also eats away at the
value of deductions and exemptions for some people with high incomes.

These statistics actually understate the extent to which tax preferences (at
least those put on the table by Romney) favor low- and middle-income Americans.
The statistics don’t include the tax exclusion for employer-provided health
insurance, which shields a larger share of income from tax for middle-income
people than for upper-income people. And they don’t account for the value of tax
credits, which disproportionately benefit the poor and middle class.

There is a large tax preference for the wealthy that does not show up in
these statistics: the preferential tax rate on capital gain on dividend income.
But Romney has specifically taken that off the table as a means of raising
revenue. (For good reason, in my opinion, but it makes the rest of his math
impossible.)

That’s why Romney can't find enough tax preferences to offset his across-the-
board rate cut -- unless he raises taxes on earners making under $200,000.
That’s not to say we shouldn’t reduce tax preferences. It is to say that we
shouldn't look to their elimination as a way to cut tax rates by 20 percent.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on
Twitter.)

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